Draft law on the external management of companies associated with hostile states

Pepeliaev Group advises that the Ministry of Economic Development, in accordance with the instructions of the Russian Government dated 8 March 2022, has prepared a draft law “On an external administration for the management of a company”. The expected new development refers to legal entities, more than 25% of whose issued capital directly or indirectly belongs to residents of states recognised as hostile by the Russian Government.  The draft law does not apply to credit and insurance institutions or non-state pension funds, with the exception of certain provisions related to the replacement of assets used in liquidation or bankruptcy proceedings carried out in relation to these companies.

The purposes of this draft law are declared as being to prevent bankruptcy and preserve business, protecting the rights of employees of these companies.  Please find below the basic provisions of the draft law.

What does external administration mean?

The introduction of external administration involves the transfer, to the temporary management of a company authorised by the state, of property of foreign companies "whose management was terminated in violation of the requirements of the legislation of the Russian Federation" after 24 February 2022. 

For which companies can an Administration be appointed?

An external administration may be introduced for companies that meet the following set of criteria (the “Companies”):

• the company’s controlling person is a foreign person from a hostile state or territory, holding in aggregate directly or indirectly at least 25% of the company’s voting shares or membership in the issued capital;
• the balance sheet value of the company's assets according to the financial statements as of the last reporting date preceding the date of submission of an application for the appointment of an external administration is more than 1 billion roubles and/or the average number of employees of the company for the month preceding the application for the appointment of the external administration exceeds 100 people.

Who performs the functions of an external administration

As a general rule, the functions of an external administration are vested in the State Corporation VEB.RF. If the company is a financial one, the State Corporation DIA performs similar functions.

In which case can an external administration be appointed?

An external administration can be appointed by the court if one of the following grounds is present:

• the company is actually left without management;
• the company’s management bodies have announced the termination of activities, terminated contracts and made more than a third of the employees redundant, performed other actions that entailed a significant decrease in the value of the company’s property and/or an inability to fulfil its obligations.

The Russian Government has the right to determine other grounds, in the presence of which a petition can be filed with the court to appoint an external administration.

For what period is an external administration appointed?

The term of the external administration's powers depends on the basis of its appointment:

• If the company was left without management, an external administration is appointed for a period of up to 3 months, and its powers cannot be terminated ahead of schedule.
• If the governing bodies of the company have taken actions that have resulted in a significant decrease in the company’s property, or have resulted in the termination of the company's activities, then the external administration is appointed for a period of 6 months; at the same time its powers may be terminated ahead of schedule.

Initiating the appointment of an external administration

A petition to have an external administration appointed can be filed with the state commercial court by:

• a member of the board of directors (supervisory council) of the company;

• the Russian Federal Tax Service (the authorised body);

• the State Corporation VEB.RF, or

• the State Corporation DIA.

Information regarding  petition being filed to have an external administration appointed shall be included by the applicant in the  the Register of Companies’ Operations no later than the day when it is filed with the court, and shall also be sent to: the Russian Federal Tax Service, the company itself to its registration address and to the potential external administration.

The court issues a decision to accept for prosecution a petition to have an external administration appointed no later than 1 business day following the day when the petition was filed.

On the basis of the applicant's motion attached to the petition to have an external administration appointed, the court, simultaneously with initiating the case, can take interim measures that can be aimed, in particular, at prohibiting:

• the acquisition or disposal of property with a balance sheet value of more than 5%;

• the dismissal of employees;

• the termination of the company’s contracts, which are essential for the implementation of the company’s activities; and

• a disposal of shares (membership in the issued capital) of the company.

The petition to have an external administration appointed is subject to consideration by the court no earlier than 5 and no later than 7 business days from the date when it was accepted by the court.

Is it possible to prevent the introduction of an external administration?

The CEO or a member of the company who owns more than 50% of the voting shares (membership interests) of the company has the opportunity to file a motion with the court before the date of the court hearing seeking a refusal to appoint an external administration in connection with:

•  refusal to terminate the activities of the company;

• the sale of its membership interest (with the buyer's obligation to keep the business, including jobs).

If it is possible to convince the court that the intentions to resume and continue the activities of the company in Russia are real, the court can issue a decision that the powers of the external administration should be terminated. Such a motion may not be resubmitted with respect to the company.

The court decision to appoint an external administration can be appealed according to the appeal procedure by a member (shareholder) of the company, as well as by the former CEO of the company.

What functions are performed by the external administration?

The external administration:

• takes measures to ensure that the organization’s activities are resumed or continued, and/or prevents its bankruptcy;

• retains the property of and jobs in the company, pays wages in a timely manner;

• forms a register of creditors’ claims;

•  identifies the company’s property, performs inventory and evaluation of it;

• replaces the company’s assets;

• holds bidding for the sale of shares;

• applies to the court with a petition for the bankruptcy of the company in the presence of signs of insolvency;

The external administration is also entitled to:

• exercise the authority of the CEO;

• file lawsuits;

• involve other persons to perform management functions;

• request all information concerning the controlling persons of the company and their property from any persons and state bodies bypassing official, commercial and bank secrecy.

The register of creditors’ claims

The external administration independently identifies the creditors of the company and notifies them of their inclusion in the register of claims. Creditors have the right to submit their claims to the external administration within 1 month. The external administration decides whether to include claims in the register within 10 business days.

The decision of the external administration based on the results of the consideration of claims can be appealed to the court within ten business days by:

• the creditor with respect to whose claims the decision has been taken;

• a member or the company’s CEO; or

• the authorised body.

Replacing the company’s assets:

When the company’s assets are replaced, another business entity is created on the basis of all the company’s assets, the only participant of which is the company. The CEO of the newly created business entity is obliged to re-enter into employment contracts with employees of the company under liquidation.

The membership interest in the issued capital of the established business entity shall be included in the Company’s property and shall be sold through a bidding procedure. The property of the entity to be created includes exclusive rights to the results of intellectual activity, trademarks and service marks belonging to Companies that meet the criteria of this draft law.

Bidding for the sale of a membership interest is carried out according to the rules of the bankruptcy law with its nuances:

• the pre-emptive right to acquire shares (membership interests in the authorised capital) is held by persons whose main activity coincides with the main activity of the company;

• members (shareholders) of the company and their affiliates are not allowed to participate in the bidding;

• the bidder is obliged to guarantee the preservation of at least 2/3 of the jobs and the continuation of the activities carried out by the company for 1 year;

• during the year following the bidding, the external administration retains authority to request information from the new CEO to confirm the performance of guarantees; if such information is not provided, the contract for the sale and purchase of the shares may be terminated.

Liquidation of the Company:

If there are signs of insolvency, the external administration is obliged to apply to the court with a bankruptcy petition with respect to the company. At the same time, the replacement of assets occurs in any case and the external administration attaches to the bankruptcy petition a regulation on bidding for the sale of shares or membership in the company’s issued capital.

Liquidation is carried out according to the rules of the bankruptcy law. At the same time, the meeting of the company's creditors in the procedures for its liquidation or bankruptcy proceedings is not held. The report on the results of the liquidation of the company with the attached liquidation balance sheet is subject to court approval.

Procedural features of consideration of a petition to have external administration initiated

• All petitions are considered by the State Commercial Court of the City of Moscow. 

• Judicial decisions issued in cases based on petitions to have an external administration appointed are subject to immediate execution from the date when the operative part was announced. 

• The single period of appeal is 14 days from the date when the judicial decision was issued. At the same time, the appeal does not suspend execution. 

• Parties to the case are notified of the court proceedings at their last known address in Russia, as well as using their telephone number or e-mail, if any.

• In the absence of a party’s address, the party is considered notified by information about the court proceedings being posted on the official website of the state commercial court.

Pepeliaev Group’s lawyers have extensive experience in the anti-crisis protection of business and providing integrated support in bankruptcy cases. We are ready to provide legal support in terms of assessing and preventing risks in relation to bankruptcy and sanctions legislation in a case of the restructuring of a business, the termination of activities of subsidiaries and structural divisions, the termination of contracts, and the initiation of bankruptcy.